Problem 1: Sub Optima Corporation has been suffering from sales demand at less than full utilization of its capacity. It has two product lines, A and B. Product line A has been weak for several years. Sub Optima has tried to maintain its pricing at $110 a unit, but has steadily lost sales volume until it slls about 100,000 units less than it did five years ago. Last year, the company sold 200,000 more units of product B, but a contract for that many units per year ran out when Sub Optima bid its usual price of $200 a unit. With that contract, product line B had operated at approximately full capacity. However, a competitor, faced with idle capacity, substantially undercut that price. No other Sub Optima customer purchases such a large volume of either product. Below are cost and revenue information and the budget for the current year. Sub Optima is under considerable pressure to turn the projected pre-tax loss into a pre-tax profit. a. At the time that Sub Optima bid on the renewal of its contract to supply 200,000 units of B to its major customer, it knew that idle capacity due to soft demand was creeping into its industry. Knowing this, management now regrets not having submitted a more competitive bid. Suppose that management had been willing to accept a pre-tax profit margin on total sales of 5% and that neither S\&A expenses nor fixed overhead costs would have increased or decreased due to winning or losing the bid. What price could they have bid on the 200,000 units in an attempt to keep the major customer? Show your work. b. Management is looking at the possibility of dropping Product A since it is the major cause of the projected loss. However, the VP-Sales has counter proposed dropping the price of A from \$110 to \$105. She believes that the company can sell an additional 100,000 units with such a drop in price and that competitors will not want to follow the price decrease because they will want to keep up their contribution margins per unit. There are several competitors, so each will lose only a fraction of Sub Optima's increased sales. However, the CEO is worried that if the competitors do retaliate with similar price cuts, Sub Optima will be stuck with a lower price and the same 500,000 unit volume. If the VP's scenario proves to be true, is it worth pursuing? Calculate the consequences if the CEO's worst fear comes true. On what factors should this decision hinge? c. In a late-breaking development, one of Sub Optima's regular customers for Product A has offered to take a special, one-time delivery of 100,000 units at $90 a unit. This customer regularly buys about 50,000 units of A each year at the average price. Determine the direct financial consequences for Sub Optima of taking this particular order and indicate whether the order would be good for pre-tax profits. Show your work and explain why profits would increase or decrease. d. Are there any indirect financial or other possible consequences of accepting the offer? What do you recommend that Sub-Optima do about this particular order? Explain your reasoning. e. How much Product A and Product B must Sub Optima sell in order to breakeven (assume the product mix as presented in the original problem)? 6.45 (LO2) Product-line Decisions, gross approach (LO2, Appendix B). Pete's Pets is an independent pet store located in Hoboken, New Jersey. Pete collects and reports operating data by "product line," with all revenues and costs being placed into one of three summary categories: (1) dogs, (2) cats, (3) birds \& fish. For the most recent year of operations, Pete reported the following results: Common fixed costs relate to rent. Since dogs, cats, and birds and fish each use one-third of the available space, Pete allocates these costs equally among the three pet-related While pleased with his overall profit and the profit on dogs and cats, Pete is concerned about the loss on birds and fish. He is thinking about discontinuing the birds and fish product line and using the space to expand his offering of dogs and cats and their related supplies. Pete believes this option would increase both dog and cat revenue by 12%; however, it would also increase dog-related traceable fixed costs by $12,500 and cat-related traceable fixed costs by $8,000. a. Using the gross approach, evaluate whether Pete should discontinue the birds and fish product line. b. For decision-making purposes, do you believe Pete needs more detailed information than is currently provided in his financial statements? Why? Problem 1: Sub Optima Corporation has been suffering from sales demand at less than full utilization of its capacity. It has two product lines, A and B. Product line A has been weak for several years. Sub Optima has tried to maintain its pricing at $110 a unit, but has steadily lost sales volume until it slls about 100,000 units less than it did five years ago. Last year, the company sold 200,000 more units of product B, but a contract for that many units per year ran out when Sub Optima bid its usual price of $200 a unit. With that contract, product line B had operated at approximately full capacity. However, a competitor, faced with idle capacity, substantially undercut that price. No other Sub Optima customer purchases such a large volume of either product. Below are cost and revenue information and the budget for the current year. Sub Optima is under considerable pressure to turn the projected pre-tax loss into a pre-tax profit. a. At the time that Sub Optima bid on the renewal of its contract to supply 200,000 units of B to its major customer, it knew that idle capacity due to soft demand was creeping into its industry. Knowing this, management now regrets not having submitted a more competitive bid. Suppose that management had been willing to accept a pre-tax profit margin on total sales of 5% and that neither S\&A expenses nor fixed overhead costs would have increased or decreased due to winning or losing the bid. What price could they have bid on the 200,000 units in an attempt to keep the major customer? Show your work. b. Management is looking at the possibility of dropping Product A since it is the major cause of the projected loss. However, the VP-Sales has counter proposed dropping the price of A from \$110 to \$105. She believes that the company can sell an additional 100,000 units with such a drop in price and that competitors will not want to follow the price decrease because they will want to keep up their contribution margins per unit. There are several competitors, so each will lose only a fraction of Sub Optima's increased sales. However, the CEO is worried that if the competitors do retaliate with similar price cuts, Sub Optima will be stuck with a lower price and the same 500,000 unit volume. If the VP's scenario proves to be true, is it worth pursuing? Calculate the consequences if the CEO's worst fear comes true. On what factors should this decision hinge? c. In a late-breaking development, one of Sub Optima's regular customers for Product A has offered to take a special, one-time delivery of 100,000 units at $90 a unit. This customer regularly buys about 50,000 units of A each year at the average price. Determine the direct financial consequences for Sub Optima of taking this particular order and indicate whether the order would be good for pre-tax profits. Show your work and explain why profits would increase or decrease. d. Are there any indirect financial or other possible consequences of accepting the offer? What do you recommend that Sub-Optima do about this particular order? Explain your reasoning. e. How much Product A and Product B must Sub Optima sell in order to breakeven (assume the product mix as presented in the original problem)? 6.45 (LO2) Product-line Decisions, gross approach (LO2, Appendix B). Pete's Pets is an independent pet store located in Hoboken, New Jersey. Pete collects and reports operating data by "product line," with all revenues and costs being placed into one of three summary categories: (1) dogs, (2) cats, (3) birds \& fish. For the most recent year of operations, Pete reported the following results: Common fixed costs relate to rent. Since dogs, cats, and birds and fish each use one-third of the available space, Pete allocates these costs equally among the three pet-related While pleased with his overall profit and the profit on dogs and cats, Pete is concerned about the loss on birds and fish. He is thinking about discontinuing the birds and fish product line and using the space to expand his offering of dogs and cats and their related supplies. Pete believes this option would increase both dog and cat revenue by 12%; however, it would also increase dog-related traceable fixed costs by $12,500 and cat-related traceable fixed costs by $8,000. a. Using the gross approach, evaluate whether Pete should discontinue the birds and fish product line. b. For decision-making purposes, do you believe Pete needs more detailed information than is currently provided in his financial statements? Why